A pied-à-terre tax is smart policy – and it’s constitutional

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Scan the windows of a luxury apartment tower in midtown Manhattan some evening and you might notice it: The lights are out. In some buildings, signs of life are so scarce that the few inhabited apartments stand out like lanterns against a sea of dark glass.

New York has always had its share of part-time residents: snowbirds who spend winters in Florida, suburban families with an apartment in the city for late nights at the office and weekends in town. Increasingly, however, the city’s housing stock is attracting the international elite, drawn by the promise of a second home (or third, or fourth) in the playground of Manhattan and a way to invest, or launder, cash.

Were New York not in the middle of a severe housing crisis, these pieds-à-terre might be of only passing concern. But as the cost of housing in New York continues to climb faster than incomes, the city can hardly afford to have so much of its housing stock underused, constricting supply and raising prices for New Yorkers.

Part-time residents do not pay local income taxes. They don’t pay sales taxes when they aren’t in town. Many of the new buildings benefit from huge tax abatements and ultra-luxury condos and co-ops are vastly under-assessed by the city’s byzantine property tax system. CityLab summarized the situation accurately in 2015, when it wrote, “The values of these new condos are being assessed at just a fraction of what they're worth. And buyers are paying only a fraction of that fraction in property taxes.” So these super-rich property owners contribute vastly less than their fair share to the cost of government services, like the parks, mass transit, sanitation and public safety that make New York a desirable place to live – and that are essential to the escalating value of their investments.

Some might be inclined to dismiss pieds-à-terre as too small a phenomenon to distort New York City’s housing market. However, the number of pieds-à-terre is growing rapidly. According to city estimates, in 2017 some 75,000 apartments were used for “occasional, seasonal, or recreational use” rather than as a primary residence – an increase of 20,000 units since just 2014. Over that same period of time, the total number of housing units grew by just 69,000 – meaning new part-time use erased almost 30 percent of the growth in overall supply. While some units were removed from the market by other forces, like Airbnb, the role of pieds-à-terre in siphoning off supply, especially in the luxury market, is real.

A tax on absentee owners, to recoup some of their gains from investing in New York real estate – or, at least, incentivize them to rent out their apartment – would help ease the tight housing market and allow the city to share in the benefits to the rich it helps to produce. Faced with similar dynamics, other cities around the globe, from Paris to Vancouver, have imposed taxes on second homes and those owned by nonresidents. In 2014, the Fiscal Policy Institute and state Sen. Brad Hoylman drafted legislation that would tax non-primary residences in New York City worth more than $5 million, and generate over $600 million a year.

Although that proposal faced obstacles in the Republican-controlled state Senate, Democrats may capture control of the chamber in November. A pied-à-terre tax is supported by New York City Council Speaker Corey Johnson and Kathryn Wylde, the president of the business group Partnership for New York City, among others. Just recently, Mayor Bill de Blasio and Speaker Johnson announced the formation of a commission to reimagine New York City’s property tax system, which would be an ideal opportunity to consider changes to the treatment of non-primary residences.

Unfortunately, this opportunity could be squandered by an erroneous view that a pied-à-terre tax would run afoul of the Constitution.

De Blasio should rest assured: Wynne does nothing of the sort. The case concerned a constitutional doctrine known as the “dormant Commerce Clause.” In essence, that doctrine prevents states from erecting barriers to trade across state lines, either by expressly discriminating against interstate commerce or by imposing an “undue burden” on interstate trade. Under those rules, state laws that explicitly favor in-state commerce against interstate commerce – say, if New York banned the import of Vermont cheese to protect New York’s dairy industry – are unconstitutional. Laws that regulate evenhandedly but burden interstate commerce, on the other hand, are upheld unless the burdens they impose clearly exceed the local benefits.

That doctrine affects the form a pied-à-terre tax would take, but not whether New York can implement one. Under these rules, New York state can’t pass a law that raises property taxes on apartments owned by out-of-state residents. That would amount to an explicit policy of discriminating against those who don’t reside in New York. New York can, however, raise taxes on apartments that aren’t used as primary residences. The difference isn’t just cosmetic: A non-resident tax targets out-of-state owners (and thus, interstate commerce) for special disfavor, but a tax on secondary homes applies to pied-à-terre owners whose primary residence is in Montauk or Mamaroneck the same as those in Montana or Moscow.

In fact, New York already imposes higher taxes on homes that aren’t used as primary residences, just not to the extent needed to tackle the problems caused by New York City’s proliferating luxury pieds-à-terre. Under New York’s STAR program, owner-occupied primary residences have been getting a break on property taxes for decades. And courts have already upheld this system against arguments that it unconstitutionally favors New York residents over nonresidents. As one New York court put it, the STAR program asks whether a home is a primary residence, not whether the owner is a New York resident. Hoylman’s 2014 bill smartly incorporates the exact same definition of primary residence used in the STAR program. Courts from Florida to Alaska and Michigan have similarly upheld property tax regimes that distinguish between primary and secondary residences.

Wynne, the 2015 case City Hall cites as an obstacle to reform, doesn’t change those results. In Wynne, the Supreme Court applied something called the “internal consistency” test to a complicated Maryland income tax scheme. That test asks us to engage in a thought experiment: Would interstate commerce be disadvantaged if every state applied a similar policy? Maryland’s system flopped that test, but a pied-à-terre tax wouldn’t: If every state had one, there would be fewer second homes, but buying a second home in one’s own state would be no more attractive than purchasing a second home across state lines.

City Hall might be mistaken about the constitutional jurisprudence, but passing a pied-à-terre tax still won’t be easy. Real estate interests, which have donated heavily to politicians in Albany, will resist change that could diminish their gigantic profits on apartments that sell for eight or nine figures.

But a policy that could increase the supply of available apartments and bring hundreds of millions in new revenues, which could fund affordable housing or other crucial needs for the city’s working-class, at least deserves the support of New York’s progressive establishment.

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As founder and research director of the Empire Center for Public Policy, E.J. McMahon is a go-to expert on budget plans and policy proposals. His organization promotes greater transparency, accountability and fiscal responsibility in state government, which often puts him at odds with lawmakers and the governor. McMahon previously worked as a journalist in Albany, as an Assembly Republican staffer and a budget adviser for almost 30 years, giving him great insight into the goings-on in the Capitol.